China technology sector stock outlook for 2023


After a bruising year, how will Chinese tech giants fare in 2023?

It’s been another rough year for China’s tech stocks. Billions have been wiped off the value of the country’s internet giants including Alibaba and Tencent and companies have posted their slowest growth rates on record.

A Covid resurgence in China, which the government countered with its strict “zero-Covid” policy of swift and harsh lockdowns in major cities, has hurt the world’s second-largest economy. Chinese internet firms have seen a slowdown as consumer spending was hit and advertising dollars were cut back.

Investors are treading with caution into next year with regard to Chinese tech stocks and analysts are broadly expecting regulation to be more predictable and growth to accelerate. But uncertainty around China’s economic outlook is creating risks.

Still, signs that China could be thinking about opening its economy again have given investors hope of a turnaround.

“We are positive on 2023 internet sector outlook in light of reopening story and improving consumer sentiment,” analysts at investment bank Jefferies said in a research note last month.

Zero-Covid relaxation in focus

China eases Covid restrictions on travel within the country

This month, Chinese Vice Premier Sun Chunlan said the Omicron variant of the coronavirus is less severe than previous versions, a shift in tone from the government ahead of announcements on relaxing Covid control measures.

On Dec. 7, Chinese authorities formalized a slew of easing measures which included allowing some people infected with Covid to isolate at home rather than at government facilities, and removing the need for a virus test for those travelling across the country.

In my view, the biggest challenge faced by tech firms next year is probably still COVID and, as a result, the weak and uncertain economic outlook.

Xin Sun

King’s College London

How the exit from zero-Covid is handled could ultimately determine the extent of the rebound for China tech.

“I will argue the prospect of a tech rebound next year depends primarily on the extent to which macroeconomy and especially consumption could recover,” Xin Sun, senior lecturer in Chinese and East Asian business at King’s College London, told CNBC via email.

“Given the current extremely suppressed level of consumption, largely due to COVID restrictions and also the lack of confidence among consumers, a tech rebound is indeed likely if China could smoothly exit from zero-COVID and reopen the economy.”

Tech growth rates set to accelerate

Analysts broadly see growth for Chinese tech names reaccelerating in 2023 as the Chinese economy prepares to reopen — but growth won’t likely be on levels seen in the past, where quarterly revenue jumped 30% to 40%.

Alibaba is forecast to see a 2% year-on-year jump in revenue in the fourth quarter of this year, before accelerating to just over 6% in the March quarter of 2023 and 12% in the June quarter, according to analysts’ consensus estimates from Refinitiv.

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Regulation becomes more predictable

Why China's cracking down on tech — and what's next

Firms that fell foul of antitrust rules were punished with large fines, including Alibaba and food delivery company Meituan, as Beijing moved to reign in the power of its internet giants which had, until recently, grown largely unencumbered.

The gaming sector has been badly hit. In 2021, regulators froze approvals for the release of new video games and brought in rules that capped the amount of time kids under the age of 18 could play online.

The rules spooked investors who were largely caught unaware by China’s regulatory assault on its tech sector.

However, there are signs that some of the regulatory pressure may be easing. Regulators restarted the approval of games this year, which will benefit Tencent and NetEase, China’s two biggest online gaming companies. The government has also on multiple occasions this year pledged to support the technology sector.

“Beijing’s top priority this year is economic growth. The crackdown-style governance is over because Beijing has recognized that it’s a bad idea to spook markets and undermine business confidence,” Linghao Bao, analyst at Trivium China, told CNBC.

“We’ve already seen some recent attempts to relax Covid measures and rescue the property markets. That said, regulations will be here to stay. That means the focus has shifted toward a more measured, predictable approach to regulating big tech.”

Changing business models

I’m more bullish than I was 6 months ago simply because I think the prices have fallen much further than future earnings estimates have had to be revised downward.

Tariq Dennison

GFM Asset Management

Alibaba, whose China retail business makes up the bulk of its revenue, is trying to ramp up sales from areas such as cloud computing to diversify its business.

Beijing has also looked to separate some financially-linked businesses related to tech firms.

Ant Group, the fintech affiliate of Alibaba, was ordered in 2021 by China’s central bank to become a financial holding company after its initial public offering was pulled in November 2020. Tencent said earlier this year that it is exploring whether regulations will require its WeChat Pay mobile payments service to also fall under a separate financial holding company.

“The crackdowns have fundamentally changed the business logic these firms need to follow … in the past Chinese tech giants strived to build the so-called ‘ecosystem’, which, by aggressively acquiring and integrating different lines of business, increased customer stickiness and engagement,” said Sun from King’s College.

“Now they have to scale back to focus on their main business lines and seek revenue growth from optimised operation and innovation.”

Biggest risks

“In my view, the biggest challenge faced by tech firms next year is probably still COVID and, as a result, the weak and uncertain economic outlook,” Sun said.

Tariq Dennison, wealth manager at Hong Kong-based GFM Asset Management, told CNBC there are also a number of geopolitical risks including American investors being blocked from buying Chinese tech stocks to companies being nationalized.

However, he clarified that these risks are present but unlikely.

“I don’t think many of those scenarios are that likely,” he said, adding that geopolitical risks are the “biggest collective threat.”

What it means for Chinese tech stocks

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One metric analysts look at is forward price-to-earnings, a measure of a company’s earnings relative to its stock price, expressed as a ratio. A high P/E could indicate that a stock’s price is relatively high compared to its earnings, and possibly overvalued.

“The average valuation of China internet names … is 14x 2023 P/E vs 22x of global peers as of 30 Nov,” Jefferies said. “We expect the market to look beyond the 2022 turmoil and revisit the sector in 2023.”

Indeed, analysts still see significant upside for Chinese tech stocks.

On average, analysts have a price target of $134.40 on Alibaba’s U.S.-listed shares, indicating roughly 54% upside from the Monday close of $87.16. Analysts have an average price target of 386.91 Hong Kong dollars on Tencent’s stock, or about 20% upside from the Monday close of HK$320.40.

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